Do exchange-contracted market makers improve market quality for liquid stocks?
(English)Manuscript (preprint) (Other academic)
This paper studies the market impacts of contracted liquidity providers by investigating the event in which NASDAQ OMX Stockholm (NOMX) introduced a liquidity provider scheme for OMXS30 constituent stocks, which are the most actively traded stocks on NOMX, in 2012. The liquidity provider scheme reduces transaction fees for registered market members if they fulfill the liquidity supplying requirement specified by the scheme. The results suggest that, on NOMX, OMXS30 stocks became more liquid after the scheme’s introduction. The liquidity improvement on NOMX was not accompanied by a lower liquidity level on Chi-X, the major alternative trading venue for OMXS30 stocks. The results do not support the view that liquidity migrated to NOMX from the alternative market after the introduction of the liquidity provider scheme. The order processing cost decreased after the scheme’s introduction, implying that qualified market makers have benefited from a cost reduction from the scheme and charge less compensation for supplying liquidity than before. Liquidity consumers’ costs have reduced accordingly. This result implies a welfare transfer from the exchange to investors. The adverse selection cost on NOMX also fell after the introduction of the liquidity provider scheme.
Research subject Business Administration
IdentifiersURN: urn:nbn:se:su:diva-119572OAI: oai:DiVA.org:su-119572DiVA: diva2:846678